Signs of deflation in the USA

In recent comments relating to the credit crisis in the USA there have been claims that the volume of broad money is collapsing and that this is going to bring on deflation which will need to be corrected with an increase in base money. I agree that an expansion of base money (ie printing currency) would be the correct cure for deflation but I dispute the notion that deflation is happening or is even likely to happen in the USA due to the current credit crisis. The current problem in the USA is a credit problem not a lack of liquidity.

Of course it could be that deflation would be happening except that the current expansion of base currency is already sufficient to neuralise the effect. Or it could be that the USA is in recession and output is falling so this offsets any decline in the money supply.

Now for some crowdsourcing. Can anybody out there in comment land find any price or index that indicates that the US dollar is increasing in value or buying power in any sort of uncharacteristically significant way. In short any price indicator that would suggest deflation is actually happening and the authorities are failing to pump out sufficient liquidity (ie not printing enough currency). I’m open to persuasion but I suspect that it is actually easier to find indicators pointing in the opposite direction.

58 thoughts on “Signs of deflation in the USA”

Can anybody out there in comment land find any price or index that indicates that the US dollar is increasing in value or buying power in any sort of uncharacteristically significant way.

Ah yea, Terje. Try the credit markets. The US dollar is sure increasing in value there.

Look, I can’t believe people are so fucking complacent with this shit. Suggesting this is a credit crisis and there no liquidity crisis beggars belief.

Funding isn’t getting to the people that need it simply because people are too scared to lend to each other. If supermarkets can’t get credit, supermarkets can’t retail food. This is where it could go.

Your the second person to say it’s a credit crisis instead of a liquidity crisis. It’s both. And either way, it leads to a lower amount of broad money.

But I didn’t predict deflation in the near term. As you note, we are seeing more base money, and we may see a decline in the real economy. And if there was going to be deflation it would take a while before we can see it.

The broad index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners. The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares.

I believe, from what you’re telling us, that its index measure the fX value of the US dollar. It doesn’t really tell us much other than such July since the time things started to get tighter, the US dollar has strengthened. People use that as a marker to indicate deflationary tendency in the US as the US dollar generally strengthens during deflationary times.

Well spotted Terje. Although we should be more mindfull of monetary deflation and not price deflation. Price deflation is good. In fact its necessary under fraud banking to force these guys, or more happily the people that replace them, to act in a wealth-creating way or go under like squeeling pigs the next time a banking crisis hits town.

There is a certain logic to this fraud banking. But it can only work under the strictist interpretation and total fidelity to the principle of equality before the law.

Look at these clowns pleading no money. And at the same time look how JP Morgan snaps up Washington Mutual. Where did it get the funds from? If there was really a breakdown in bank-to-bank lending then they would be in no position to take over a hotdog stand let alone a big bank. So people are showing arbitrary favourtism behind the scenes quite apart from the pending bailout. There is absolutely no reason why Washington Mutual ought to have been given to JP Morgan to run as opposed to me for example. We’ve got to get over this idea that any sort of looting of this type is just OK and according to Hoyles.

Any low interest loan by government is stealing and crony-communism.

The fact is that any one of us here who had access to the sort of low interest loans that the Fed doles out to cronytown could use them to buy up companies and make billions and the only difficulty would to be avoid winding up like some sort of mindless non-wealth-creating twit with a sense of entitlement.

So its all bloody phoney. To get this right, even if you guys are so damn committed to fractional reserve, it would have to be under growth-deflation, or commodity backing, and absolutely all entitities treated as equal before the law.

I mean thats the great thing about fractional reserve. That it holds the hope out that these guys and all their phoney risk assesment song and dance men will go to the wall. And maybe some former bondholders with a lot of cash show up and decide that they’d like to try this banking deal out.

Notice how Buffet dealt with things. He wouldn’t do it that way if he wasn’t anticipating a bailout. Supposing someone wanted to go into banking and do it right for a bloody change. This would be an ideal time. There would be all these bankers secretly sending their staff home without pay or paying them in IOU’s and they are just there too scared to move like rabbits in the headlights. A whole bunch of people could be flush from cashing out their government bonds. They show up and offer to buy a few branches, Thats an offer that a bank without government backing cannot refuse in the circumstances of a ponzi-money break-down.

And so I say that the fraud banking has a certain logic to it so long as you take the strictist interpretation to matters as Humphreys appears to be doing.

Look I’m sick of this nonsense of it being a credit crisis and not a liquidity crisis. This is all rubbish banking jargon talk.

Let me explain this to the very stupid and to the laity. Credit means loans. And it either means loans that can be turned to cash or it doesn’t. Most of the time it means loans that could possibly be turned to cash but in practice it won’t be.

But in a banking crisis its the ability to turn loans into cash that is critical. Because everyone is frightened and sitting on their own cash. A true banking crisis means people are frightened to let go of their own cash to anyone they don’t have to.

So this is all a stooge. Credit just means loans. And the only reason anyone cannot give a loan is that he has cash committments that make him too frightened to make the loan. So any credit crisis is a cash crisis. Thats just a fact. Don’t let the looters and crony-communists pull a fast one on you.

We must go over it again. There is an inner circle of cash. And there is an outer circle of ponzi-money. Aka fiduciary money, or bank-pyramided money. For this to be functional the banks have to be willing to endorse eachothers loans. They hold overdraughts with eachother. Lines of credit. They have to do this to successfully pyramid the ponzi-money on top of the cash.

If they stop loaning to eachother that fiduciary money is not really functional. Since if they make a loan now, that loan will quickly result in a demand for cash. Which they have very little of.

Once the public gets wind of it they will pull all their funds out of the institution. Which shows why it is that there must be no government guarantees to peoples deposits because you want them pulling all that cash out to stop any moral hazard on the part of the banks, and so these guys will go broke and new people come in who can do the job in a more wealth-creating way.

There is simply no such thing as a credit crisis that is not a cash crisis. This sort of misunderstanding comes from not defining what you mean properly. Which is habitual in banking.

Its obviously deflation – falling home prices, collapsing share prices, a contraction in credit; all of these are deflationary.

This graph shows a sharp dropping in interest rates which shouldn’t happen during inflation or stagflation. It looks a lot more like 1990’s style Japanese deflation, where they had zero interest rates for a while:

The US base money supply has not been expanding at all recently:

Also, the fact that the price of gold is still relatively low lends support to deflation. If 1970’s style hyperinflation were here, gold along with other commodities would have shot through the roof.

jc. A burger, never liked USA hamburgers, but as you know I don’t like much about the place.

Mark the banks will have to be recapitalized, the only unknown is the amount of pain we have to suffer before people get over it. Last time unemployment got to 25%, I don’t think that is needed this time (about Thursday I reckon for the USA congress will panic), nobody is going to pretend there is a gold standard to protect and I think there is enough people who understand that M3 money supply matters, without capital in the banking sector there is no serious leverage players.

I think the big difference this time is the lack of any gold standard to protect so the monetary base can be moved to wherever the reserve banks thinks it should be to get us through, my bet, the increase will be bigger this week.

I may be fool but I’m a buying. My foundation arguments is this, if things go pair shape, the command economies did the best through the depression, China is still a mixture, they will need raw materials. Pig iron bob here we come.

Can anyone do the numbers on how much cash the Fed has injected in the last 12 months? Then compare that to what has been happening to M0-M3 to see where the injections have been occurring – currency level, or credit level.

Where do REPO operations fit into this M0-M3 hierarchy? And where do house values and share portfolio values fit?

Does anyone know what components banks can actually use as security against outstanding loans and investments? My understanding at the moment is that they operate on pretty low capital reserve (everywhere but Australia that is!!!)…can anyone verify that? That will be the kicker on whether banks can actually call upon and use the Fed injections.

Mind you, that will only help us describe the problem…but if you can describe the problem maybe that can lead us to a question and an answer to the problem.

jc I’m a student of history. Command economies failed which I am sure mark will tell me all about, but during the depression the capitalist economy were failing,which I have no doubt some don’t accept (25% unemployment and democracy is unsustainable0, the command economies were not. The capitalist economies didn’t recover until they took a few hints from the other side of the fence ( that is my view anyway). My world view has no problems supporting the bale out, a messy mixed economy work. The government will get it money back when capitalist get over themselves.

M3 money supply in the US is no longer reported by the US buthttp://www.shadowstats.com/alternate_data and others are showing a turning in 2008, I agree with your interpretation of the oecd figures. But I think it has to be falling , you can’t got through the deleveraging we are seeing without a reduction in M3.

The ” command economies” were basically using a good portion of the labor as slaves.

Furthermore there is nothing in economics which says you can’t run say a controlled wage rate set below the clearing level and have full employment. You can. In fact you don’t even require a command economy to do that as the Scandis do that now through a central wage fixing mechanism. The government directs the wage below the clearing rate and off you go.

However that never creates good or high paying jobs and fast rising living standards.

The US suffered very high rates of unemployment during the 30’s primarily because both the Hoover and then FDR administrations used all sorts of tactics such as laws and strong arming to maintain high wage rates and farm output prices. The end result was very high levels of unemployment.

There’s no secret in all this, Charles. However to suggest the totalitarian regimes had it all over the western democracies over this issue is to simply ignore the reality of economics and the brutality of those regimes. I would have much rather lived off a soup kitchen in the US than in Germany or the Sov.

More interesting is M3/M0 and M1/M0. Dunno what they mean for certain, but I can try
1) M1/M0 has been falling for decades. People are saving less (less deposits in comparison with currency/cash).
2) M3 flatlined 1990-1993, and M3/M0 and M3/M1 decreased. This has not been the case to the end of the figures.

We could probably use M2 instead of M3 to tell us what is happening, but I’d need to extract current US Fed numbers (rather than rely on an old Wiki extract) which I don’t have time to do tonight. I suspect that M3 may have done something like what happened 1990-1993…hence the attempts to expand it.

The interesting number is that from December 1959 to December 2007, US currency on issue (M0) has been growing at 7% per annum, on average. What has US economic growth averaged over this time?

The interesting number is that from December 1959 to December 2007, US currency on issue (M0) has been growing at 7% per annum, on average. What has US economic growth averaged over this time?

2 1/2% is a rough guess. Growth rate.

Ah yes currency, ignore that number. There’s about 700 billion traipsing around the world facilitating the drug and arms trade. Some of that is US currency residing outside the US. The Fed take that into account in sorting out its M’s etc as that money doesn’t hit the continental US otherwise if they didn’t count it as sitting outside the US it would be highly deflationary

JC — you also need to look at legitimate growth in asset values. That’s not included in growth statistics, but is a legitimate reason to increase money supply.

Charles — the great depression was caused by a normal downturn mixed with contractionary monetary policy. It included business failure, but business failure is not the same as market failure. By 1933 the economy had recovered to pre-1929 levels and was moving forward. The socialist “solutions” didn’t kick in until after that. So clearly it was not those policies that “fixed” the great depression.

Big business failures can be difficult for many people. But while we have a world with mistakes, we need to have a mechanism for fixing mistakes. The market is much better at fixing mistakes. Socialism had to hide the mistakes for years and then collapse the entire system. The market doesn’t have that problem.

If you’ve seen Peter Schiff before (on youtube) then I can tell you he didn’t say anything new last night on Lateline.

He is a very tenacious speaker, and was absolutely determined to have the last say despite Tony Jones trying to cut him off.

One thing he said did surprise me, and that is that he thinks a collapse in the US economy will be good for the rest of the world, esp. Asia. Most commentators think the opposite. His argument seems to rest on the notion that the US has crowded out consumption in Asia. Once US consumption falls, consumption in Asia will pick up thus ensuring ongoing growth.

In 1933 unemployment in the USA was 25%, there is no way the figures can be twisted to make what was still an increasing rate look like the 1929 rate.

The market had collapsed, banks had not been recapitalized and in a period of reduced economic activity ( which results in reduced tax revenue) Hoover was trying to balance the budget, this resulted of cause in reduced federal activity.

You would do well to actually read up on the history of the period. Fortunately I think there is enough people who have and the disaster will not be repeated.

The Great depression highlighted the instability of capitalism and the strength of democracy, the incompetent narrow minded one system fits all crowd were voted out a messy mixed economy crowd voted in.

It worries me a little that both presidential candidates talked about balancing the budget, you do that in the upturn not the downturn, Bush messed it up and you can’t unmess it in a recession.

JC makes the right point (comment #24) about the amount of US currency (base money). A lot of it is fascilitating trade outside of the USA. This is why I think quantity targets are generally unreliable and price targets work better. However if base currency has suddenly grown in an uncharacteristic way then most of that probably is new liquidity designed to hold the line on interest rates.

Pommys point about oil (comment #1) would have more merit if not for the fact that the oil price has been on the up for so long. A slight pull back would suggest disinflation more so than deflation. Of course the latter would still be significant in so far as it would singal a reversal. I haven’t looked at a good price chart on oil for a while so I won’t discount it entirely. The first chart on the following article would seem to offer some merit to pommys point, but again it would suggest disinflation* more so than deflation:-

Temujins point in his second paragraph (comment #4) makes sense. However I’d simply quote the old management cliche “if you can’t measure it you can’t manage it”. If the only indicators of deflation (or inflation) are lagging indicators then we stuck with perpetual oscillation.

Monetary price rules, whether they target the price of credit (ie interest rates) or the price of money such as the gold exchange rate (under a gold standard) or the foreign exchange rate (under a fixed exchange rate regime) do automatically expand the base money supply in response to deflationary pressure. So perhaps in this regard the system is working and deflation is being neutralised (by currency expansion) as it is being created (by credit collapse).

* The distinction between disinflation and deflation is subtle but relates to what precedes it (inflation or stability) and the timeframes involved. Commodities prices have been signalling inflation for some time so any pull back in the price of commodities to levels seen recently is merely disinflation. If it was pulling back to levels not seen for a long time then I’d call it deflation. Supply siders, who follows such things, typically look at the current price relative to the ten year average. Although some use more complex models such as the following:-

Charles and Jono – I don’t think asset prices count too much on their own. There are a lot of other more fundamental reasons why assets would rise or fall in value. However I don’t discount these indicators entirely.

That should also clear up any controversy over the employment capacity of the US during the depression. Employment dropped sharply after 1930 due to the Smoot Hawley Tariff Act (a wrong headed, messy, mixed economy response to falling GDP and employment). Hoover and Roosevelt’s expansionist macroeconomic and invasive microeconomic policies prolonged the fall to four or so years, but clearly employment was higher in 1929 than in 1933. Roosevelt’s policies also caused a series of rolling recessions such that total employment fell in 1937 again (even with deportation explained below).

Hoover had no interest in a balanced budget. His Treasury Secretary, Andrew Mellon did. However, the proportion of Federal Govenrment debt to GDP rose from 20% to 40% of GDP.

It was not just in terms of fiscal policy that Hoover was an interventionist.

He passed a bil that forced 500 000 Mexicans and Mexican Americans back to Mexico, a measure which lasted until 1937.

From wikipedia:

“Also, a “check tax” was included that placed a 2-cent tax (over 30 cents in today’s dollars) on all bank checks. Economists William D. Lastrapes and George Selgin,[20] conclude that the check tax was “an important contributing factor to that period’s severe monetary contraction.””

The Check Tax: Fiscal Folly and The Great Monetary Contraction Journal of Economic History, 57(4), December 1997, 859-78;

Here is how FDR (who quickly turned his back on good policy) summarised Hoover [who was a moral conservative but a progressive]:

*Roosevelt blasted the Republican incumbent for spending and taxing too much, increasing national debt, raising tariffs and blocking trade, as well as placing millions on the dole of the government. Roosevelt attacked Hoover for “reckless and extravagant” spending, of thinking “that we ought to center control of everything in Washington as rapidly as possible,” and of leading “the greatest spending administration in peacetime in all of history.” Roosevelt’s running mate, John Nance Garner, accused the Republican of “leading the country down the path of socialism”.*

Charles- something else to consider, about Scandinavian countries. If Nokia and Ikea both went pear-shaped, so would their home countries, because they are small, specialised, economies.
And Sweden is changing its’ social system- too many people rorting the system! They used to have a pay-as-you-go scheme, but then they ‘harmonised’ with the rest of Europe.

Charles, it takes employment longer to rebound, but by 1933 the American economy was back to it’s 1929 size. At that time, employment started going back up again. That’s not in despute. Then their economy grew for a few years, saw another (smaller) recession, and then kept growing again.

I agree that business crisis and recessions do show that instability of capitalism. But that’s not a bad thing. Life is unstable. People make mistakes. No economic or political system is going to stop that. Capitalism adjusts quicker and better than the alternatives.

I also agree that the government doesn’t need to balance the budget during a downturn. But I don’t think that caused the great depression.

Look Humphreys. What are you doing to me. My email isn’t working. But you let a few comments through and then you don’t seem to be letting them through anymore. Even though I haven’t taken a shot at you or been swearing at people too much.

I thought this was something of a truce. Why be evasive. You need to justify this fractional reserve favouratism. Not stamp out any debate. Firstly you have to understand the issue. Before you get to thinking that you ought be controlling the propaganda.

How many people know that the banking industry doesn’t just get a cut of the interest from new money creation?

How many people know that they manage to commandeer the entirety of the interest AND the entirety of the principal in those cases that involve new money creation.

HOW MANY PEOPLE KNOW THIS?

This is something they ought to know. And they ought to muster the moxie to stop people from stealing from them.

Why do you want to spend taxpayers money (probably the depositholders money you are tyring to “save”) to recapitalise banks which have only or mostly non performing, less than loan value assets to service their interest and deposit obligations? Is this really viable in the long run?

Fortunately Australia had two banks fail (Victoria and South Australia state banks), a building society (Pyramid) , a couple of merchant banks, a credit union and a friendly society fail around 1990, it’s the reason why our banking regulations are what they are.

When your discussing the cause of the great depression you are not discussing Australia.

Mark it’s a dynamic system, if it all clogs up there are no tax payers. Tax is about creaming circulating funds. The total US tax is about 2500 billion a year. A 25% reduction in economic activity will reduce that by about 700 billion dollars a year. Oh yes it’s a lot of money, but the cost of getting it wrong will cost a hell of a lot more.

To your question: We traditionally use private banks to leverage funds. I can’t see governments doing a better job so we are stuck with them. What is being proposed is for the government to take the banks sus loan book, hold it to maturity so the banks can make some more loans ( sus or otherwise), that is get a bit of money circulating. Total loss to the government, the actual default rate on the loans less whatever discount they buy it at. Current value of the paper in the market zero, banks win.

If the government prevents the glorious capital market meltdown your gunning for they win because the tax revenue keeps flowing.

No. It is about involuntarily paying for Government goods and services by sacrificing a larger amount of production than the dollar cost of providing the services.

Your idea about creaming funds is hinted at being a bad idea by the discussion of the cheque tax above.

Where the hell are you pulling this 25% drop in economic activity from? It seems like you are pulling this out of your rear end charles. The US banking system has not collapsed. Yes there has been a credit squeeze. However, viable businesses have seen a profitable opportunity and are otherwise providing credit below the LIBOR benchmark bank swap rate. See below:

Money and new credit is already circulating, regardless if the package gets passed in the next hour or so.

There is no “capital market meltdown”. The sharemarket and lending sector still exists. They have made provision for bad debts and have been revalued accordingly. New companies are still raising finance through equity (check the ASX and NYSE float lists), people still get 100% [100% + someitmes] home loans and commercial paper markets still exist.

There is simply no need for the package to be passed and the Government to intervene.

That 840 billion has to come from somewhere, why take it away from capital markets that have corrected and are issueing new lines of credit and debt?

Basically you’re subsidising insolvent banks at the expense of going concern firms lending spare cash in order to prop up the banks just in case no money gets lent out.

Mark I think the best time to think about tax is driving along the road. Where did the infrastructure I’m currently using come from would be a good starting question.

As for the 700 billion coming from somewhere, I’m going to ask you a question your going to find very frustrating, no doubt you will dismiss it as lefty crap. Why does the money have to come from anywhere, today’s reality, you don’t even have to print the stuff.

There is in my view an answer; the money has to be put in circulation in a manner that allows it removal when inflation gets out of hand. A government that wants a stable money supply over the long term has to lend into circulation.

charles – the next time you are driving, consider that each $1.00 that our Australian Governments collect (not effectively spent, mind you) costs between $1.19-$1.69 in lost production (“reasonable” estimates are considered to be $1.30-$1.40).

Where does the money come from charles?

Bush is running a 9.6 trillion dollar deficit. The money must come from new taxation, inflation of the currency (basically a transfer of assets from those holding cash to the insolvent firms), incresing the real cost of fund or by issuing more debt – which also increases the real cost of funds, crowding out private investment in an already shaky economy.

Tax – directly stunts productivity and labour supply

Inflation – creates more credit market mispricing of assets and malinvestments, encourages an unsustainable business cycle

Debt – raises the cost of funds to productive businesses, crowds out new, productive business, during a credit crisis for the benefit of insolvent, poorly managed banks.

I think it is a terribly irresponsible idea.

It seems redundant to transfer wealth from banks and other firms who kept on lending. Clearly the credit market has not dried up. Consequentialist arguments for the subsidy are unfounded. So why should poorly managed firms be given a hand up?

Mark I really don’t understand, we have the highest standard of living ever, countries far more regulated than ours ( Sweden, Singapore and Norway) have similar or high standards of living yet on the other hand it takes no effort to find a country with a smaller government sector with a lower standard of living.

Yet in all seriousness ( I assume) you write posts like the last. Have you never slowed down to ask how it happened, what does the common do to make it all possible.

I can’t understand why you’re talking about deflation one moment and then bullock trains. I think you’re nuts but we’ve taken a liking to you around here.

Monetary disequilibriua is the problem. It causes asset mispricing and malinvestments. Both inflation and deflation should be minimised.

charles, you are seriously misinformed. Having no legal framework in a country and calling it a “free market” is a clever sleight of hand, but it doesn’t prove anything. According to that definition, Antarctica was a free market until the Antarctic Treaty System. Clearly you see why it is an absurd idea.

You need a reality check my friend.

Sweden has 25% real unemployment. This was the number quoted by the head of the top labour union – a typically democratically socialist organisation. Yet they were openly critical of the outcomes of heavy handed social democracy. You tell me what it means when a hard lefty criticises the outcomes of left wing economic policy? You do realise that Sweden has 64% income tax rates and a 25% VAT don’t you charles? [Australia already has a problem in keeping young professionals but you see no problem in exacerbating the brain drain with usurious taxation – even though you were wetting your pants over the “skill shortage].

Hong Kong has a higher standard of living and higher growth rates than Singapore and is a free market economy. Norway would be on thin ice if not for their oil sector. They are practically living to excess on oil revenue. Note that in the early 2000s, the Scandinavian countries all cut back on welfare and freed up labour markets because the situation was more or less unsustainable.

Furthermore, there are countless studies which show the higher the level of public sector spending the lower a country’s growth rate. You seem to think because some first world countries are cannibalising their own economies and poorer countries can’t afford to do it (but in Eastern Europe or Panama for example, have had major laissez faire policy reforms and 10% + GDP growth), that it is a good idea. Basically these countries are indulging in self harm.

Let’s have a closer look at one of the Scandinavian countires, Denmark:

*But let us look at some other economic statistics that are not mentioned nearly as often.

Denmark has an entire population of 5,350,000 people. Of them, 1,150,000 are below 18 years old. Of the remaining 4,200,000 people, 2,214,000 people receive government transfer payments (not counting 260,000 students that receive public scholarships of $550 per month).

When you recalculate these 2,214,000 people, of whom some receive only part-time government transfers, into people who live full-time on transfer income, the total becomes 1,590,000 people living off transfer payments.

Out of these 1,590,000 people, 710,000 are pensioners and the remaining approximately 900,000 are working-age people. Most of them cannot be found in the unemployment statistics. They are on other kinds of public transfer programs of which there exist ten different types.

There are approximately 1,900,000 people working in the private sector and 840,000 working in the public sector or publicly owned companies. (The reason the numbers do not add up to 4.2 million is because not all are full time workers.)

We can conclude from this that of the people in the working age of 18 to 66, more than one quarter live passively on government transfers (full time). For every 100 persons employed full time in 1999, there were 33 working-age people receiving support. Adding pensioners, the total number was 61 people on full time transfer income for each 100 full time employed persons. (The pensioners are financed by a pay-as-you-go pension scheme). And out of those who are employed, 31.5 percent work for the government.

All of this, of course, needs to be financed. Denmark has therefore for many years had a very high and continuously increasing tax level.

In 2002, the lowest marginal income tax level is 44.31 percent, then it increases to 49.77 percent and 63.33 percent. Forty percent of the working people pay the top marginal tax rate of 63.33 percent, which applies to all income over $33,000.

There are very few tax deductions available, and the tax value of the tax deductions is continuously being reduced.

A sales tax of 25 percent hits just about everything.

The capital gains tax is 59.7 percent for a private person in the high income tax bracket, unless you hold your investment for more than 3 years. It then falls to 44.8 percent.

There are additional taxes on “sinful” and “luxury” products likes cigarettes, alcohol, candy, soft drinks, electronic goods, and other luxuries.

For cars, there is a 180 percent special tax on top of the sales tax of 25 percent. Then there is a registration fee and a weight fee to be paid twice per year for the privilege of using the roads. The price of gasoline is nearly three times as high as it is in the US.

Denmark imposes many new green taxes. These are the taxes that have increased most substantially during the 1990s. These taxes hit heating, electricity, water, and gasoline.

Real estate, which is already heavily taxed, has been the target of new taxes throughout the 1990s. In addition, the tax value of deductions have been continuously reduced.*

In later article (change the url story no. to 1274), Hansen goes onto say:

*People can feel socially secure in Denmark—at least for now. People don’t get rich from welfare but they can live a comfortable life. Practically all people are eligible for one program or another. But the system is unsustainable in the longer run. In the early 1970s only about 300,000 people of working age lived full-time all year on government welfare. Today it is about 900,000. The population size has remained unchanged at around 5 million. In the not too distant future, more people are going to be pensioners and fewer people will be working age. At some point, the trough will be empty.*

Like I said: it is unsustainable.

On the supposed link between welfare and the reduction in crime:

*Of the people who do get married, more people get a divorce today. In 1975, 18 per cent of all the marriages from 1950 had ended in a divorce during the preceding 25 years. In 1995, 36 per cent of the marriages from 1970 had ended in a divorce. Of marriages in 1985, 20 per cent ended in a divorce after only 7 years. As a result of the above, many more people live in single households today than did in 1960. In 2000, one third of all adults in Denmark were living alone.

If we next look at the crime level, the Danish Statistical Yearbook 2002 shows reported crimes from 1935 to 1960 to be stable: about 100,000 crimes per year. But from 1960 until today, the number of crime reports has increased by 500 percent, to more than 500,000 per year. And if we look at violent crime, the picture is even grimmer. The number of violent crimes in 1960 was approximately 2,000; it is approximately 15,000 today. This is an increase of more than 700 percent, and it is still rising steeply.

This is a very surprising development. Welfare state advocates often say that crime is caused by poverty. Well, Denmark has become about twice as rich per citizen during this period of rising crime. Another argument is that poverty is caused by economic inequality. Well, Denmark has engaged in the most comprehensive income redistribution program of any nation. Denmark is the most egalitarian country in the world today.*

Education:

*Let’s now look at education. Many people believe that if education were not provided by the government, only rich people could afford it. Let us compare Denmark to the U.S., where public funding of especially higher education is not nearly as readily available as it is in Denmark. According to the report “Education at a Glance” from the OECD, 15 percent of people between the ages of 25 and 64 has a bachelor degree or more in Denmark. In the U.S.A., it is 26 percent—nearly twice as many. In Sweden, the number is 13 percent, and Norway 16 percent.*

Health:

*What about health? Denmark is one of the few OECD countries where the average life span has hardly increased since the early 1970s. In the early 1970s, Denmark was at the top in OECD comparisons; today it is closer to the bottom.*

A good summary of why this is happening to Denmark:

*Sound economic theory can explain the shortages and continuously falling quality in government-provided health care and education. When suppliers are not driven by the profit motive, nor subjected to market competition, they cease being customer oriented. Quality declines and costs rise. Due to the lack of market prices, and therefore no economic calculation, they can neither plan efficiently nor satisfy consumer demand. They do not have the information or the incentives to make rational decisions. This was the case in the formerly centrally planned economies. It is also the case in Denmark, where central planning also prevails in parts of the economy, most significantly in health care and education.

In conclusion, we can say that neither on crime, education nor health do we see the favorable results we would have expected. Quite to the contrary. The prospects for being able to rely on government or family for social security are also rapidly diminishing. These are not very bright prospects indeed for a country where each working citizen are forced to sacrifice such a large share of his personal earnings to the common good.*

What can a young Danish person do? Apparently some people don’t like freedom and prosperity, however:

*One option for young people is to leave. It was recently proposed by one of the three economists from the Danish Economic Council that if young people in Denmark wish to move abroad after they have completed their education, they should first have to pay back the costs of their education. Only when they have paid enough taxes to cover all the expenses of their education, would they be able to move abroad without having to pay the government first.

Thus do we have proposed the social-democratic version of the Berlin Wall, an economic barrier to prevent emigration so that the state can continue to tax people to sustain a system that is unravelling. The mere suggestion is a telling sign that Denmark has nearly reached the end of the road.*

charles asks:

“Have you never slowed down to ask how it happened, what does the common do to make it all possible.”

Charles – roads are a drop in the bucket compared to total government spending. And most government funded roads are local roads paid for by local rates in most cases. Even then they only represent a small part of our rates. And whilst rates are still a tax few people here would regard rates as the first form of tax that should be reduced.

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Bold Green solutions. Make Australia a renewable superpower! 200% renewable energy!! These ideas are popular. They’re doable. They’re right at our fingertips. All we need is the political will. Just do it!!!